MPS recognises money matters
Sunday, 25 July 2010
BANGLADESH Bank (BB) has presented us with a well-crafted programme of monetary management that seeks to balance the economy's competing demands of growth and price stability. Of late, both of these macroeconomic indicators suffered; one from external factors of a global slowdown, another, from a rate of monetary expansion that ran ahead of output of goods and services. In crafting its latest monetary policy statement (MPS), BB has come to recognize -- somewhat belatedly -- the fundamental monetarist dictum: money matters. It has taken into account the government's overall policy stance announced via the FY2011 budget, to pursue faster inclusive economic growth and poverty reduction while maintaining price stability. To this end, the primary focus seems to have been laid on putting the inflation gini into the bottle with a cap of 6.5%, as envisaged in the budget.
While it is difficult to question the overall strategy, one finds potential conflicts underlying the twin objectives of curbing inflation while fueling growth. BB would have to effectuate a remarkable balancing act to ensure the simultaneous fulfillment of the twin objectives, especially in light of the past record of monetary expansion. The fact is that broad money -- the main aggregate indicator representing the economy's money supply -- has been growing at around 19% for the past three years. In this backdrop, BB is proposing to slash its growth rate down to 15%, primarily by curbing private sector credit, but letting public sector credit to grow at a whopping 25% rate. This would be akin to putting a hard brake on a speeding vehicle at a time just when private sector investment was showing signs of a pick up, to take risks in new investment. On this one count alone, this could be labeled a restrictive monetary stance which runs counter to the MPS claim to project a "growth supportive stance to promote inclusive economic growth with due vigil against inflationary pressures".
Expecting the public sector to pick up the slack is hoping against hope. That would have to be based on the presumptions of abject failure in the government's revenue mobilization effort, a better than expected performance in Annual Development Programme (ADP) implementation and slower borrowing from non-banking sources. One final component of monetary aggregate - net foreign assets, based primarily on foreign exchange reserve accumulation - is slated to grow by a mere 4.0% after growing at 27% in the past year. This projection is based on a high degree of pessimism in remittance inflows coupled with robust growth in imports, with a consequent squeeze on the current account surplus. This presumption, if true, is misplaced in view of exports growing at a 20% clip in the last quarter and remittance showing no signs of a dip. Though gross foreign exchange reserves have hit $11 billion mark, it is still merely five months of projected imports -- not a cause for too much comfort. Though no mention is made of any switch in exchange rate policy, the presumption would be of a continuation of the previous approach of retaining Taka on a slight undervaluation bias.
Yet, for all its shortcomings on the policy front, one would be hard pressed to fault the latest MPS for its consistency with numbers. After years of monetary excesses, the MPS acknowledges the simple arithmetic of the relationship between the flow of output (gross domestic product) and money supply. It recognises the simple dictum that too much money chasing too few goods results in inflation. Present levels of point-to-point inflation cannot be attributed to external factors any more. For years together, it turns out that BB has been letting money supply grow at a rate much faster than domestic output.
Not any more of the same, claims the MPS. So to keep money supply growth in the coming year from fueling inflation, BB has set its target growth of broad money (aggregate money supply) at 15%, which is just enough to support the growth of nominal GDP at about 13% (6.7% real growth plus inflation of about 6.5%) and a 2.0% margin for increase in monetization that comes with higher economic activity. If BB is successful in keeping a tab on its targeted indicators, it will have succeeded at least in keeping the inflation menace at bay. Whether it is equally successful in stimulating growth remains to be seen.
While it is difficult to question the overall strategy, one finds potential conflicts underlying the twin objectives of curbing inflation while fueling growth. BB would have to effectuate a remarkable balancing act to ensure the simultaneous fulfillment of the twin objectives, especially in light of the past record of monetary expansion. The fact is that broad money -- the main aggregate indicator representing the economy's money supply -- has been growing at around 19% for the past three years. In this backdrop, BB is proposing to slash its growth rate down to 15%, primarily by curbing private sector credit, but letting public sector credit to grow at a whopping 25% rate. This would be akin to putting a hard brake on a speeding vehicle at a time just when private sector investment was showing signs of a pick up, to take risks in new investment. On this one count alone, this could be labeled a restrictive monetary stance which runs counter to the MPS claim to project a "growth supportive stance to promote inclusive economic growth with due vigil against inflationary pressures".
Expecting the public sector to pick up the slack is hoping against hope. That would have to be based on the presumptions of abject failure in the government's revenue mobilization effort, a better than expected performance in Annual Development Programme (ADP) implementation and slower borrowing from non-banking sources. One final component of monetary aggregate - net foreign assets, based primarily on foreign exchange reserve accumulation - is slated to grow by a mere 4.0% after growing at 27% in the past year. This projection is based on a high degree of pessimism in remittance inflows coupled with robust growth in imports, with a consequent squeeze on the current account surplus. This presumption, if true, is misplaced in view of exports growing at a 20% clip in the last quarter and remittance showing no signs of a dip. Though gross foreign exchange reserves have hit $11 billion mark, it is still merely five months of projected imports -- not a cause for too much comfort. Though no mention is made of any switch in exchange rate policy, the presumption would be of a continuation of the previous approach of retaining Taka on a slight undervaluation bias.
Yet, for all its shortcomings on the policy front, one would be hard pressed to fault the latest MPS for its consistency with numbers. After years of monetary excesses, the MPS acknowledges the simple arithmetic of the relationship between the flow of output (gross domestic product) and money supply. It recognises the simple dictum that too much money chasing too few goods results in inflation. Present levels of point-to-point inflation cannot be attributed to external factors any more. For years together, it turns out that BB has been letting money supply grow at a rate much faster than domestic output.
Not any more of the same, claims the MPS. So to keep money supply growth in the coming year from fueling inflation, BB has set its target growth of broad money (aggregate money supply) at 15%, which is just enough to support the growth of nominal GDP at about 13% (6.7% real growth plus inflation of about 6.5%) and a 2.0% margin for increase in monetization that comes with higher economic activity. If BB is successful in keeping a tab on its targeted indicators, it will have succeeded at least in keeping the inflation menace at bay. Whether it is equally successful in stimulating growth remains to be seen.